Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether proposed exploration expenses qualify as Canadian exploration expense under paragraph (f) of the definition of CEE in ss. 66.1(6).
Position: Yes.
Reasons: The proposed exploration expenses will qualify as CEE based on the presented facts, the certification issued by Natural Resources Canada, and current law.
XXXXXXXXXX
2016-063967
XXXXXXXXXX, 2016
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayer. We also acknowledge receipt of the additional information provided by email on XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer named above, none of the issues involved in the ruling request is:
(i) involved in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving the taxpayer or a related person, except for Advance Income Tax Ruling 2014-0534121R3 issued to the Corporation on XXXXXXXXXX.
DEFINITIONS
In this letter, unless otherwise expressly stated, the following terms have the meanings specified below:
a) “Act” means the Income Tax Act (Canada), RSC 1985, c.1 (5th Supp.), as amended to the date of this letter;
b) “Canadian development expense” has the meaning assigned to that term by subsection 66.2(5) of the Act;
c) “Canadian exploration and development overhead expense” has the meaning assigned to that term by paragraph 66(12.6)(b) of the Act and subsection 1206(1) of the Regulations;
d) “Canadian exploration expense” has the meaning assigned to that term by subsection 66.1(6) of the Act;
e) “Canadian resource property” has the meaning assigned to that term by subsection 66(15) of the Act;
f) “Concession” means XXXXXXXXXX;
g) “Corporation” means XXXXXXXXXX;
h) “Corporation’s Property” means the properties acquired by the Corporation on XXXXXXXXXX that consist of rights, titles and interests in properties spread over an area of approximately XXXXXXXXXX. This includes XXXXXXXXXX;
i) “Exploration Program” means the Corporation’s XXXXXXXXXX that is the object of the proposed transactions;
j) “flow-through share” has the meaning assigned to that term by subsection 66(15) of the Act;
k) XXXXXXXXXX;
l) “XXXXXXXXXX” means XXXXXXXXXX, a corporation that was known as XXXXXXXXXX before it changed its name in XXXXXXXXXX. XXXXXXXXXX is not related to the Corporation and is the current owner of the surface rights on the Concession;
m) “XXXXXXXXXX” means the ore body from which gold, copper, silver and zinc was produced by the XXXXXXXXXX;
n) “XXXXXXXXXX” means the mineral resource deposit located in the Concession and within the urban limits of the city XXXXXXXXXX;
o) “mineral resource” has the meaning assigned to that term by subsection 248(1) of the Act;
p) XXXXXXXXXX;
q) “principal-business corporation” has the meaning assigned to that term by subsection 66(15) of the Act;
r) “public corporation” has the meaning assigned to that term by subsection 89(1) of the Act;
s) XXXXXXXXXX;
t) XXXXXXXXXX;
u) XXXXXXXXXX;
v) “Regulations” means the Income Tax Regulations, enacted under the Act;
w) “taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1) of the Act; and
x) “Technical Report” means the XXXXXXXXXX.
Unless otherwise specified, all section references contained herein are to sections of the Act, and all references to monetary amounts are in Canadian dollars.
Our understanding of the facts, proposed transactions, additional information, and purpose of the proposed transactions is as follows:
FACTS
1. The Corporation was formed on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX). The Corporation completed an initial public offering on XXXXXXXXXX and changed its name to XXXXXXXXXX on XXXXXXXXXX, when its shares commenced trading on the XXXXXXXXXX under the trading symbol “XXXXXXXXXX”. The name was recently changed to the Corporation.
2. The Corporation is a taxable Canadian corporation, a public corporation and a principal-business corporation. The taxation year of the Corporation ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The head office is located at XXXXXXXXXX. The Corporation is serviced by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office of the Canada Revenue Agency. The Corporation is engaged in the business of mining, exploration and evaluation of mineral resource properties.
3. The Advance Income Tax Ruling (2014-0534121R3) was issued to the Corporation on XXXXXXXXXX and confirmed that the XXXXXXXXXX has lost its characteristics as a mine in a mineral resource for the purpose of subparagraph (f)(vi) of the definition of “Canadian exploration expense”. The Corporation issued flow-through shares in XXXXXXXXXX and raised capital in the amount of $XXXXXXXXXX.
The Corporation’s Property
4. The Corporation owns XXXXXXXXXX% interest in the Corporation’s Property.
The Concession
5. The Concession is located in XXXXXXXXXX. The Corporation owns the mineral rights contained at a depth XXXXXXXXXX in the Concession. XXXXXXXXXX owns XXXXXXXXXX% of the surface rights on the Concession and the mineral rights contained XXXXXXXXXX. The Concession is accessible via XXXXXXXXXX.
6. The XXXXXXXXXX was located in the Concession and was the only workings capable of producing ore that has existed in the Concession. Outside the Concession, there were other producing mines that were owned and operated by unrelated parties. There were XXXXXXXXXX former operating mines on properties adjacent to the Concession. The Corporation does not expect or intend that any exploration or future production from the XXXXXXXXXX or from any of the other ore zones in the Concession will be conducted from the workings of any mine that is not situated in the Concession.
7. In order to produce from the Concession in the future, the Corporation needs to develop a new mine by constructing its own workings.
The XXXXXXXXXX
8. The XXXXXXXXXX lies in the Concession. The XXXXXXXXXX estimate is based on XXXXXXXXXX underground drill holes drilled in the XXXXXXXXXX and XXXXXXXXXX drill holes (XXXXXXXXXX) drilled by the Corporation in XXXXXXXXXX. The XXXXXXXXXX estimate also includes XXXXXXXXXX completed in the XXXXXXXXXX.
9. XXXXXXXXXX.
10. XXXXXXXXXX.
11. XXXXXXXXXX.
12. The estimate combines the results of the XXXXXXXXXX surface confirmation drilling program and the historic drilling data collected by XXXXXXXXXX between XXXXXXXXXX. The majority of the XXXXXXXXXX drilling was conducted as XXXXXXXXXX.
The XXXXXXXXXX
13. The XXXXXXXXXX located XXXXXXXXXX of the XXXXXXXXXX and produced approximately XXXXXXXXXX. The XXXXXXXXXX has ceased to exist. The XXXXXXXXXX is separated from the XXXXXXXXXX. Currently, there are no resources present in the XXXXXXXXXX.
Underground Exploration Expenses
14. The total costs of the Exploration Program can be summarized as follows:
Description Cost
XXXXXXXXXX XXXXXXXXXX
TOTAL XXXXXXXXXX
PROPOSED TRANSACTIONS
15. The Corporation is pursuing the Exploration Program. The XXXXXXXXXX.
16. To adequately conduct the Exploration Program regarding the currently identified and inferred mineral resource, the Corporation will be required to conduct additional underground drilling in the XXXXXXXXXX. The XXXXXXXXXX will require underground drilling.
17. The Corporation will conduct an evaluation of the mineral resource in the XXXXXXXXXX and the XXXXXXXXXX to determine the extent and quality of the mineral resource. This would include evaluating metallurgy on historic core samples from the XXXXXXXXXX and the XXXXXXXXXX, gathering and reviewing the available historical data about the XXXXXXXXXX and other mineral deposit zones in the Concession and the XXXXXXXXXX such as in the remnants of the XXXXXXXXXX to expand and upgrade the resource estimates in the Concession and the inferred mineral resource estimate for the XXXXXXXXXX.
18. The Corporation intends to perform geological work, including compilation and review of data gathered to date to assess additional work that would need to be undertaken to further define the XXXXXXXXXX and mineralization of other ore deposit zones in the Concession and the XXXXXXXXXX. The Corporation recently completed an updated compliant resource estimate for the XXXXXXXXXX.
19. The Corporation will conduct XXXXXXXXXX to allow underground drilling. In order to be able to conduct the Exploration Program in the XXXXXXXXXX, the Corporation will have to install a system to XXXXXXXXXX.
20. Considering the Exploration Program in the XXXXXXXXXX, the Corporation will have to secure the existent underground facilities to be able to install a temporary XXXXXXXXXX. The Corporation will lease the XXXXXXXXXX will be removed after completing the XXXXXXXXXX.
21. If the Corporation decides to pursue its project and start production, the temporary installations will have to be taken off. During the production, the XXXXXXXXXX.
22. In view of the depth of the Exploration Program, the Corporation has to provide secured facilities that will allow the Corporation to conduct its underground exploration program (up to XXXXXXXXXX below the surface, as currently permitted by the Department of Natural Resources). This operation will include XXXXXXXXXX.
23. A XXXXXXXXXX and the Corporation is only allowing, from the $XXXXXXXXXX budgeted, $XXXXXXXXXX for the purchase of XXXXXXXXXX that will be used during the work period.
24. All the equipment and facilities regarding the underground set up are temporary and their purpose is to allow the Corporation to conduct its underground Exploration Program.
25. The results at each stage will determine the next steps, including the appropriate drilling program to undertake in the Concession, such as confirmation drilling, a diamond drill program on surrounding areas of the XXXXXXXXXX, metallurgical testing on future drill holes and mineral resource estimation, and the design and execution of such programs.
26. To date, the Corporation has not completed any pre-feasibility study or feasibility study to inform a decision to bring a mine into production. On XXXXXXXXXX, the Corporation completed a preliminary economic analysis that showed that there are only “inferred” and “indicated” mineral resources, and that there are not any “proven reserves” or “probable reserves”. Following the filing of the preliminary economic analysis with SEDAR, the Corporation does not have sufficient information to make a decision to bring a mine into production. The Corporation has not yet made a decision to bring a mine into production.
PURPOSE OF THE PROPOSED TRANSACTIONS
27. The Proposed Transactions are being undertaken for the purpose of conducting the Exploration Program to determine the existence, extent and quality of gold, silver and base metals in the XXXXXXXXXX and the XXXXXXXXXX.
28. The Proposed Transactions will allow the Corporation to gain greater confidence and certainty with respect to the location, nature, extent and quality of the XXXXXXXXXX and the XXXXXXXXXX.
29. The Corporation wishes to issue flow-through shares to assist in financing the Exploration Program. The ability to finance with flow-through shares depends upon the ability of the proposed expenditures to qualify as Canadian exploration expense.
30. The Corporation will renounce the Canadian exploration expense to the flow-through shareholders in accordance with subsections 66(12.6) and 66(12.66).
31. If the Exploration Program proves successful, and assuming a positive production decision can be made and that the development of a mine can be financed, the Corporation intends to take the project to production.
RULING
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, our Ruling is as follows:
Subject to our Comments below, we confirm that an expense incurred by the Corporation - after the date of this letter - in respect of the Exploration Program and incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in the XXXXXXXXXX or the XXXXXXXXXX, including any expense incurred in the course of:
(i) prospecting,
(ii) carrying out geological, geophysical or geochemical surveys,
(iii) drilling by rotary, diamond, percussion or other methods, or
(iv) trenching, digging test pits and preliminary sampling,
but not including
(v) any Canadian development expense,
(v.1) any expense described in subparagraph (i), (iii) or (iv) in respect of the mineral resource, incurred before a new mine in the mineral resource comes into production in reasonable commercial quantities, that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of all such expenses exceeds the total of those revenues, or
(vi) any expense that may reasonably be considered to be related to a mine in the mineral resource that has come into production in reasonable commercial quantities or to be related to a potential or actual extension of the mine,
will qualify as a Canadian exploration expense pursuant to paragraph (f) of the definition thereof in subsection 66.1(6) of the Act, provided that:
(i) the expense does not constitute the cost, or any part of the cost, to the Corporation of any depreciable property; and
(ii) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any mineralization that may be found on the XXXXXXXXXX or on the XXXXXXXXXX.
Except as expressly stated, the Ruling provided does not imply acceptance, approval or confirmation of any income tax implications of the Facts or Proposed Transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:
(i) the reasonableness of any expenditure referred to in this letter;
(ii) whether any particular expense incurred by the Corporation qualifies as a Canadian exploration expense, or whether any particular expense not considered to be a Canadian exploration expense qualifies as a Canadian development expense;
(iii) whether any particular expense incurred by the Corporation that qualifies as a Canadian exploration expense or a Canadian development expense will be held to be a Canadian exploration and development overhead expense;
(iv) whether the Corporation is a principal-business corporation or whether any share issued by the Corporation will be a flow-through share;
(v) the determination of the fair market value or adjusted cost base of any property referred to herein; and
(vi) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the ruling given above.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29th, 2014, and is binding on the Canada Revenue Agency provided that the Corporation commences implementing the Proposed Transactions by XXXXXXXXXX.
This Ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Yours truly,
XXXXXXXXXX
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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